Saving for Unemployment

I know what you’re thinking—don’t I mean saving for retirement? That’s what everybody talks about, right? Correct. Everybody talks about retirement, including myself, but this time I really mean saving for unemployment.

Why? It’s simple really. Hopefully, unless we die first, we all get to retire once. Some people go back to work, but it’s usually a “retirement job”. But for those of us in the baby boomer generation (post World War 2, 1946 to 1964), according to the US Bureau of Labor Statistics, we can expect to be unemployed an average of 5.2 times over our working lifetimes.

Us Baby Boomers are all headed towards retirement already. So if the Boomers experience an average of 5 bouts of unemployment—what about then Gen-Xers and the groups after them? The Boomer generation experienced some of the greatest economic growth our country has ever seen—it’s quite possible that the younger generations could experience even more bouts of unemployment than we have.

So when I say you need to save for your unemployment, I am very serious.

Here’s what I’m seeing in the tax office. People come to me to do their taxes after they’ve been laid off. They have no savings so they dip into their 401(k)s to pay for groceries and stuff until they find a job. They keep spending at the same level they did while they were still employed, but their 401(k) money often has no withholding and there’s a 10% penalty for taking it out too soon. Tax time rolls around and they are stuck with a huge income tax bill—which they can’t afford to pay—so they take more money out of their 401(k)! It’s a vicious cycle. Sadly, there’s not much I can do to help here, especially after the damage is already done.

The big concern all these people have in common is that they did not have anything in their savings accounts when they lost their jobs. That’s a big problem all across America—people don’t have money in their savings accounts!

Think about this: Suppose your take home pay is $2,000 a month. Let’s say your rent is $1,000 a month. You spend about $500 a month on food and other necessities, and you’ve got about $500 extra that you play with. (Yes, I’m making the numbers easy.) Your bare minimum to survive is $1500 a month. Now, if you have zero dollars in your bank account and you lose your job—well you’re in dire straits in less than 30 days, right? You can’t make your rent payment. But if you have been putting $200 a month away for the past year, you’d have $2400 in the bank. At least your rent would be paid for another month and if you qualified for any unemployment benefits you might have 2 months worth of rent and food. Having some savings set aside buys you an important commodity: time.

Ideally, you want to have enough money to support you for at least six months of joblessness. The fellow in our scenario above would want to have $9,000 put away. ($1500 of monthly minimum expenses times 6 months = $9,000.) At $200 a month, that would take him almost 4 years of saving and I know that’s a little intimidating. But baby steps are how you get there. Everybody has to start someplace. Unless you’ve already been saving, it’s going to take some time to shore up enough money to support yourself for half a year. The big point here is to get started.

Pick a goal. Don’t have one? I’ll give you one. Start with $1,000 in the bank. $1,000 is way better than nothing isn’t it? Gives you a little cushion, right? If you’ve already got $1,000 saved, then your next goal is $5,000. If the $1,000 is still too intimidating then your goal is $100. You don’t even have to have the $100 in a bank—you can hide that under your mattress if you want. But by the time you get to $1,000 you really need to have a bank account.

Don’t get me wrong, it’s still important to save for retirement. But statistically speaking, you’re five times more likely to be unemployed for awhile before you ever reach retirement age. Oh, and what if I’m wrong and you never go jobless even once during your entire working career? Well that’s okay, now you’ve got some extra money saved for your retirement!

Oh and a note from my editor: Also know that you can deduct certain job search expenses as miscellaneous itemized deductions only if these expenses exceed 2% of your income and the job is in the same line of work as your prior one. Such expenses include employment agency placement fees, resume expenses, travel and transportation expenses, and local and long distance phone calls. And another note from me: The IRS keeps telling us that all the time, but in real life I have very few clients who actually get any tax benefit from that deduction. Keep your receipts, just in case, but for most folks, that deduction is pretty worthless.